Hong Kong launches cross-border collateral management service today

Hong Kong boosts its position as a prime offshore renminbi liquidity center.

Beginning today (June 25), Hong Kong will allow international financial institutions to obtain Hong Kong dollars or renminbi liquidity from local banks by using their securities held as collateral with J.P. Morgan & Co. or Euroclear SA/NV.

The Hong Kong Monetary Authority recently signed agreements to this effect with both institutions. HKMA Deputy Chief Executive Peter Pang said more than 30 banks had expressed an interest in the service.

HKMA said it would expand the service to allow local banks to use their securities as collateral to obtain foreign currency such as U.S. dollars from international banks in the second half of this year.

This cross-border collateral management arrangement will serve as the infrastructure supporting repurchase agreement transactions. It is expected to boost the Hong Kong’s repo and its status as an offshore renminbi liquidity center.

The agreements are part of Hong Kong’s efforts to continue the rapid development of the offshore renminbi market. Yuan deposits in Hong Kong increased five times to hit US$95 billion in November since July 2010 when China eased rules for the use and circulation of the renminbi in the city. Deposits, however, dropped to US$87 billion at the end of April.

In a repurchase agreement, two parties agree that one will sell securities to another and make a commitment to repurchase equivalent securities on a future specified date at a specified price.

Founded by J.P. Morgan, Euroclear is a financial services company that specializes in the settlement of securities transactions and the safekeeping and asset servicing of these securities.